Bank Crises and Sovereign Defaults in Emerging Markets: Exploring the Links

Balteanu, Irina; Erce-Domínguez, Aitor

doi:10.24149/gwp184

Cited by 13 publications

(11 citation statements)

References 41 publications

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“…A recent empirical study on banking crises and sovereign defaults is the one by Balteanu et al (2011). Banks are highly exposed to sovereign debt.…”

Section: Empirical Evidencementioning

confidence: 99%

Sovereign defaults and banking crises

Sosa‐Padilla

2018

Journal of Monetary Economics

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Episodes of sovereign default feature three key empirical regularities in connection with the banking systems of the countries where they occur: (i) sovereign defaults and banking crises tend to happen together, (ii) commercial banks have substantial holdings of government debt, and (iii) sovereign defaults result in major contractions in bank credit and production. This paper provides a rationale for these phenomena by extending the traditional sovereign default framework to incorporate bankers who lend to both the government and the corporate sector. When these bankers are highly exposed to government debt, a default triggers a banking crisis, which leads to a corporate credit collapse and subsequently to an output decline. When calibrated to the 2001-02 Argentine default episode, the model is able to produce default in equilibrium at observed frequencies, and when defaults occur credit contracts sharply, generating output drops of 7 percentage points, on average. Moreover, the model matches several moments of the data on macroeconomic aggregates, sovereign borrowing, and fiscal policy. The framework presented can also be useful for studying the optimality of fractional defaults. JEL codes: F34, E62

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“…A recent empirical study on banking crises and sovereign defaults is the one by Balteanu et al (2011). Banks are highly exposed to sovereign debt.…”

Section: Empirical Evidencementioning

confidence: 99%

Sovereign defaults and banking crises

Sosa‐Padilla

2018

Journal of Monetary Economics

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“…Reinhart and Rogoff (2012) show that (i) private and public debt booms ahead of banking crises, (ii) banking crises, both home-grown and imported, often accompany sovereign debt crises and, (iii) public borrowing increases sharply ahead of debt crises and (iv) it turns out that the government has "hidden debts" (domestic public debt and contingent private debt). Closely related,Balteanu and Erce (2014) show that twin sovereign debt and banking crises in emerging countries occur always in combination with boom-bust patterns on the banking system.…”

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confidence: 94%

Bank and Sovereign Risk Feedback Loops

Erce¹

2015

SSRN Journal

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Measures of Sovereign and Bank Risk show occasional bouts of increased correlation, setting the stage for vicious and virtuous feedback loops. This paper models the macroeconomic phenomena underlying such bouts using CDS data for 10 euro-area countries. The results show that Sovereign Risk feeds back into Bank Risk more strongly than vice versa. Countries with sovereigns that are more indebted or where banks have a larger exposure to their own sovereign, suffer larger feedback loop effects from Sovereign Risk into Bank Risk. In the opposite direction, in countries where banks fund their activities with more foreign credit and support larger levels of non-performing loans, the feedback from Bank Risk into Sovereign Risk is stronger. According to model estimates, financial rescue operations can increase feedback effects from bank risk into sovereign risk. These results can be useful for the official sector when deciding on the form of financial rescues.ABSTRACT: Measures of Sovereign and Bank Risk show occasional bouts of increased correlation, setting the stage for vicious and virtuous feedback loops. This paper models the macroeconomic phenomena underlying such bouts using CDS data for 10 euro-area countries. The results show that Sovereign Risk feeds back into Bank Risk more strongly than vice versa. Countries with sovereigns that are more indebted or where banks have a larger exposure to their own sovereign, suffer larger feedback loop effects from Sovereign Risk into Bank Risk. In the opposite direction, in countries where banks fund their activities with more foreign credit and support larger levels of non-performing loans, the feedback from Bank Risk into Sovereign Risk is stronger. According to model estimates, financial rescue operations can increase feedback effects from bank risk into sovereign risk. These results can be useful for the official sector when deciding on the form of financial rescues.

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“…For a summary of the literature, see http://www.worldbank.org/en/publication/gfdr/background/banking-crisis foreign liabilities (Hahm et al 2013). Alternatively, the non-financial corporate sector may be unable to repay its international creditors or, at least, to repay its domestic creditors as well (Panizza and Borenzstein 2009, Reinhart and Rogoff 2011, Hahm et al 2013, Balteanu and Erce 2014. If the government attempts to defend the currency and attract capital by raising interest rates and expending reserves, as mentioned, it may only exacerbate the credit crunch (Stoker 1994, World Bank 2015.…”

Section: Theoretical Mechanisms and The Related Empirical Literaturementioning

confidence: 99%

Banking Crises, External Crises and Gross Capital Flows

Janus¹,

Riera‐Crichton²

2016

gwp

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In this paper, we study the relationship between banking crises, external financial crises and gross international capital flows. First, we confirm that banking and external crises are correlated. Then, as we explore the role of gross capital flows, we find that declines of external liabilities in the balance of payments -a proxy for foreign capital repatriation we call gross foreign investment reversals (GIR) -predict banking as well as external crises. Finally, we estimate the effects of GIR-associated banking crises on the risk of currency and sudden stop crises in an instrumental-variables specification. In developing countries, GIRassociated banking crises increase the onset risk for currency and sudden stop crises by 39-50 and 28-30 percentage points per year respectively. For OECD countries, we show an increase in the currency crisis risk by 33-45 percentage points. JEL codes: F32,

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Bank Crises and Sovereign Defaults in Emerging Markets: Exploring the Links

Cited by 13 publications

References 41 publications

Sovereign defaults and banking crises

Sovereign defaults and banking crises

Bank and Sovereign Risk Feedback Loops

Banking Crises, External Crises and Gross Capital Flows

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